The Nifty has built up the largest net long positions in futures, as of 10 June. These positions are the largest since the March 2020 covid lockdown.
The current market price action is influenced by several factors, including the US Fed rate hikes, the taper tantrums, and inflation fears.
Were these events unexpected?
Of course not. Amid covid, central banks increased the money supply in the market. ( They printed alot) As anyones guess, this printing of new money leads to increase in inflation .
Based on definitions in macroeconomics books, a rising interest rate will cause a decrease in the money supply. Money will be more costly to acquire.
Did this happen before – past data ?
Yes. In 2013. The Asset Taper (FED rate hike) were on similar line. Fed initiated “taper tantrum” back in 2013.
QE: Quantitative easing was done due to 2008 financial crisis. Similarly, QE by printing more money occurred during Covid lockdown. Check the pic below.
FED started to raise interest rates in 2015. This time its 2022.
What happened to Indian Equity markets post-Fed Rate hike?
The fundamentals of India have improved much better than the situation of 2013 which explains why this selling pressure has not caused big harm. But the Pattern is similar.
As of Jun 3, 2022 RBI data -total forex reserves of India stood at $600B. Therefore, we are with much better import cover than 2013. Import cover stands for total no of months of import could be managed by forex reserves.
Foreign Direct Investments (FDI) flows are considered as a stable source of economy.
Compared to 2013, their levels are close to double due to the current economic conditions.
We are also backed with robust tax collections. On Apr 22, recorded the highest GST collection of 1600 (INR Bn).
What we can expect?
Increases in interest rates are necessary to combat rising inflation. This rate was increased three times during the 2013 events. It took less than a year for the repo rate to rise from 7.2% to 8%.
Currently, the RBI has increased the repo rate twice. It has moved from 4% to 4.9% in the past 2 months. Given the past nature of RBI, it makes sense that we should expect more increases in the future.
In 2013 FPI selling was limited to 3 months on an average of 10,000 CRs per month. From May 2013 to Aug 2013 Nifty drawdown was by -16%. Nifty fell from 6000 to 5100 levels on 2013.
Now despite the insane selling of FPI with an average of 25,000 CRs per month. From October 2021 to June 2022 (9 months) , there has been a -17% drawdown. From a high of 18500, nifty crashed till 15300 support levels.
The fact that this big hit has been less intense can be attributed to the strong economic growth and the contribution of domestic players, such as institutions and rapidly increasing retail investors.
In order to see 18500 levels again in near term, FPI must buy again. This can be seen as an accumulation phase for good blue-chip stocks until then.
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